With mortgage rates climbing more than 3% so far this year, it is tricky to get the lowest interest rate mortgages these days; but not impossible. Business has slowed dramatically and solutions to find the lowest interest mortgages are necessary to encourage buyers to buy in this high rate environment. Some mortgage brokers are bringing out programs we haven’t seen, or needed, in years.
Lower mortgage payments
One of the mortgage options available is an interest rate buy down. Basically, you pay the mortgage company the interest at Closing instead of in monthly installments. Ultimately, the amount of interest the bank collects is the same so how is this better for the buyer? It’s better because we ask the seller to pay it in our purchase contract! Depending on the specifics of the particular buy down program, an up front payment can lower the monthly payments by hundreds.
The most commonly known interest rate buy down is paying points. This is when the mortgage company receives money at Closing to buy the rate down for the length of the mortgage. There are also temporary buydowns that let you buy the rate down for two or three years. The temporary buy down is cheaper and works well when you don’t anticipate owning the home very long or if you think interest rates will go down in the near future.
Temporary interest rate buy downs
Every lender may have their own programs so it’s best to talk with the lender you plan to use for your purchase. Here are some examples of how the programs work.
If you have a 2-1 buydown, the interest rate is reduced by 2% for the first year and by 1% for the second year. The amount of up front costs depends on the purchase price of the home. A rough example based on my calculations would be around $11,000 up front for a $360,000 loan. That would buy your interest rate down to 4.5% for the first year, 5.5% for the second year and back to 6.5% for the remaining 28 years. Of course, this example assumes a 6.5% rate is the current rate. That makes your payment $600 a month lower the first year and $300 a month lower the second year. After that, you would need to refinance to get a lower rate, or continue on with the current mortgage.
Another option is the 3-2-1 buydown. That is 3% lower year one, 2% lower year two and 1% lower year 3. That would probably bump up your cash at Closing to $20k. If the seller were to take that $20k off the list price of the house instead, your monthly payment would go down around $100 for the life of the loan.
The rule of thumb I have heard is if you plan to keep the home longer than 5 years, a longer term buydown may be worth it. However, you may not break even if the home is sold is less than five years. Calculations can be done to determine the break even point for your specific circumstances so you can make the right decision for you.
Future interest rates
The talk around the industry is rising rates for the next year. Then a plateau and, after that, they should settle in around the 5% range. We hope that is true. If so, it stands to reason that a temporary buydown would give you a lower interest rate until you could refinance your entire loan at a rate around 5%. The risk of course, is that no one knows what the future holds. If rates stay high, you would not want to refinance and would be stuck paying the higher rate of interest. This is definitely a decision where weighing the pros and cons for your specific circumstance would be necessary to ensure it is the right decision.
Talk to some of our local, Summit County lenders to see what programs and rates are available to you. You can also reach out to us for more info. Keep in mind, we are not mortgage lenders so cannot give specific information about loan programs. We are happy to help however we can.